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2012 (7) TMI 147 - AT - Income Tax


Issues Involved:
1. Legality of the assessment order.
2. Disallowance of contributions to PF/ESIC.
3. Disallowance of weighted deduction under Section 35(2AB) for scientific research expenses.
4. Disallowance of foreign exchange rate fluctuation.
5. Calculation of Arms Length Price in respect of international transactions with Associate Enterprises.
6. Disallowance under Section 80HHC.
7. Allowance of MAT credit before charging interest under Sections 234B and 234C.
8. Levy of interest under Sections 234B and 234C.
9. Disallowance of prior period expenses.

Detailed Analysis:

1. Legality of the Assessment Order:
The appellant contended that the assessment order passed by the Commissioner of Income Tax (Appeals) [CIT(A)] was bad in law and deserved to be canceled. However, the tribunal did not specifically address this ground, implying no substantial discussion or decision was made on this point.

2. Disallowance of Contributions to PF/ESIC:
The tribunal noted that the issue of disallowance towards contributions to PF/ESIC was covered in favor of the assessee by the Supreme Court's decision in CIT vs. Alom Extrusions Ltd. The tribunal held that payments made within the grace period or before the filing of the return should be allowed. Consequently, the disallowance made by the Assessing Officer (AO) was deleted, and the appeal on this ground was allowed.

3. Disallowance of Weighted Deduction under Section 35(2AB):
The tribunal noted that the AO disallowed the weighted deduction for scientific research expenses on the basis that the expenses were not incurred on in-house R&D facilities. The tribunal referred to previous decisions, including the case of ACIT vs. Torrent Pharmaceuticals Ltd., and concluded that clinical trials and certain research expenses, even if not conducted in-house, are eligible for weighted deduction under Section 35(2AB). The tribunal directed the AO to reconsider the deduction for payments to various institutions and allowed the deduction for clinical trial expenses. The matter was partly remanded for fresh consideration.

4. Disallowance of Foreign Exchange Rate Fluctuation:
The tribunal upheld the disallowance of foreign exchange rate fluctuation expenses, agreeing with the AO that such expenses related to the acquisition of plant and machinery and should be treated as part of the block of assets, allowing only depreciation. This decision was based on the precedent set by the Delhi High Court in CIT vs. Woodward Governor India Pvt. Ltd.

5. Calculation of Arms Length Price:
The tribunal found that the CIT(A) did not provide a speaking and reasoned order regarding the calculation of Arms Length Price for international transactions with Associate Enterprises. The issue was remanded back to the CIT(A) for a fresh decision with a detailed and reasoned order.

6. Disallowance under Section 80HHC:
The tribunal addressed three aspects of the deduction under Section 80HHC:
- Inclusion of excise duty and sales tax in total turnover was decided in favor of the assessee, following the Supreme Court's decision in CIT vs. Sri Jaya Jothi and Co. Ltd.
- Reduction of 90% of miscellaneous income from business profit was upheld against the assessee.
- Set-off of negative profit against positive profit was also decided against the assessee, following the Supreme Court's decision in IPCA Laboratory Ltd. vs. DCIT.

7. Allowance of MAT Credit:
The tribunal directed the AO to allow MAT credit before charging interest under Sections 234B and 234C, in line with the Supreme Court's decision in CIT vs. Tulsyan NEC Ltd.

8. Levy of Interest under Sections 234B and 234C:
This ground was deemed consequential to the decision on MAT credit and was not independently analyzed.

9. Disallowance of Prior Period Expenses:
For the assessment year 2003-04, the tribunal rejected the claim for prior period expenses, finding no merit in the assessee's arguments and insufficient evidence to support the claim. The tribunal upheld the disallowance of expenses related to advertisement, cost audit fees, and raw material purchases.

Conclusion:
The appeals for assessment years 2002-03 and 2003-04 were partly allowed, with specific issues remanded for fresh consideration and others decided based on existing legal precedents. The tribunal provided detailed reasoning for each decision, ensuring compliance with relevant judicial decisions and statutory provisions.

 

 

 

 

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